By Alec Macfarlane
HONG KONG (Reuters Breakingviews) - In a food fight between China’s three web giants, Tencent looks strongest. A food-delivery business backed by Alibaba is close to buying a Baidu-owned rival, says a person familiar with the matter. The combined firm will nonetheless struggle to unseat the Tencent-backed Meituan-Dianping, which 86Research says is now the market leader.
The internet trio are competing to connect smartphone users with neighbourhood services such as taxis and cinema tickets. Ordering meals online is the next front line – industry revenue is due to reach 300 billion yuan ($45 billion) in 2018, more than double last year, says Meituan-Dianping.
Combined, Alibaba’s Ele.me and Baidu’s Waimai would have about 50 percent market share, putting them roughly on par with Meituan-Dianping, says 86Research’s Xiaoyan Wang.
But Meituan-Dianping is in a strong position. Integrating two workforces and technology platforms could distract Ele.me, and prompt restaurants and delivery drivers to defect to Meituan-Dianping, which will be free to focus on winning new business. The latter also has a built-in advantage in its ties to Tencent’s WeChat, the phenomenally popular chat app.
What this means for competition is an open question. The industry has seen an expensive subsidy war but investors say this is already abating. Typically, shrinking the market to a duopoly would result in an even more rational attitude to pricing.
Here, however, it could come down to whether the two rivals think food apps will prove a “winner-takes-all” market like internet search, where huge benefits accrue to being the largest, or one that can sustain two profitable platforms for ordering noodles and pizza online.
Meituan-Dianping would find it easier to float if competition was less fierce. Overall the group, which spans various local services such as group-buying and reviews, is profitable, but investors say its food business is loss-making.
But if Alibaba and Tencent believe first place is the only trophy worth having, both might be willing to spend heavily to get there – as local ride-hailing firm Didi did to force Uber out of the Chinese market. Reuters says Meituan-Dianping is raising as much as $5 billion at a valuation of up to $30 billion. That would help underwrite a lot of discounted dinners.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.